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Volume 69, Issue 2

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Multiscale Volatility Transmission and Portfolio Construction Between the Baltic Stock Markets

Đurašković, Jasmina; Manić, Slavica; Živkov, Dejan

Year: 2019   Volume: 69   Issue: 2   Pages: 211-235

Abstract: This paper investigates volatility transmission and portfolio construction between the three Baltic stock indices at different time-horizons. Methodologies used for this study encompass parametric EGARCH model and the three non-parametric approaches – wavelet coherence, wavelet correlation and phase difference. Wavelet coherence indicated that risk integration between the Baltic stock markets is not so strong, while wavelet correlations confirmed this contention more precisely. Additional analysis showed that low wavelet correlations are also present between the Baltic indices and the German DAX index. These findings may suggest that the selected indices could be useful for the construction of risk-minimizing portfolios. In order to confirm (discard) this assumption, we constructed wavelet-based two-asset portfolios. The results provided evidence that hedging opportunities exist when the Baltic indices are combined between themselves, but also when they are coupled with the DAX index. This is particularly true for the longer time-horizons.

JEL classification: C22, C61, G11

Keywords: Baltic stock indices, volatility transmission, EGARCH model, wavelet coherence, wavelet correlation, phase difference

RePEc: https://ideas.repec.org/a/fau/fauart/v69y2019i2p211-235.html

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